Argentine Polar Cold

Las Lenas Argentina Web Cam

Las Lenas Argentina Web Cam

The Web Cam at the ski resort in Las Lenas Argentina.

http://img.snow-forecast.com/webcams/Las-Lenas.jpg

It’s Cold in Argentina

It’s darned cold in Argentina this winter…

From:

http://www.bloomberg.com/news/2010-07-19/argentine-industries-face-gas-shortages-as-record-cold-winter-spurs-demand.html

(I’ve bolded some interesting bits)

we have:

Argentine industrial users such as Dow Chemical Co. are suffering gas shortages amid a record cold winter in the Latin American country where temperatures fell below those in the South Pole.

and further down:

Argentine gas supplies are being reduced this month as demand increased during a polar front that brought snow to 12 of the country’s 23 provinces and pushed temperatures below those of Antarctica. Temperatures in Mendoza, the wine-producing region in western Argentina, fell as low as -8.9 degrees Celsius (16 degrees Fahrenheit) on July 15.

So “Don’t Cry For Me Argentina!” your tears might freeze on your face and give you frostbite…

Economics Point

I’ve decided I need to add an economics point to the postings about weather and climate issues. To me, it was obvious that weather and economics are ‘joined at the hip’, but I’ve realized that understanding is largely a result of growing up in a farm town then having a formal economics education at an Ag School. So I’ll be adding a “what this means to economics and making money” item to some of the weather items.

OK, why does this matter?

Natural Gas:

The demand for natural gas is more than supply. Expect natural gas prices to rise (in Argentina at least). There is also a growing trade in global LNG shipments. To the extent this continues, the LNG shippers and folks who build the equipment to handle liquid cryogenic natural gas facilities will also benefit.

Further, we’ve seen cold in South Africa and Australia / New Zealand as well. This is NOT just a local weather event. It’s a regional cooling. That means it is likely to have global implications.

And that’s part of why I was buying the LNG shippers and oil and gas trusts with large dividends some months ago.

But wait, there’s more!

Natural Gas is a key feedstock to making most “petro” chemicals. The petrochemicals really ought to be called the “carbon chemicals” as they can be made from any carbon source. EMN Eastman Chemical uses coal (and has since before folks learned to use oil for the job, later replaced with natural gas after the Arab Oil Embargo moved folks to natural gas in volume). So companies like Dow and Dupont (DD) will be losing competitive position to EMN. In South Africa, Sasol (SSL) also uses coal and will be advantaged vs the natural gas users.

What happened in 2007 is an example of what I’d expect to see again:

http://www.icis.com/Articles/2007/07/10/9043970/argentina-pe-production-plummets-to-40.html

HOUSTON (ICIS news)–Argentina’s strangled feedstock supply has brought domestic polyethylene (PE) production down to about 40% of capacity, as unusually cold weather continues to pose problems, an source at Dow Chemical said on Tuesday.

Two of four PE plants in Argentina remain down due to shortages of electricity and raw materials aggravated by a cold weather snap that brought snow to Buenos Aires for the first time since 1918, the source said.

So when it gets cold in Argentina, they cut off the chemical companies to keep the folks warm. That will put a dent in profits for chemical companies… but look for gas utilities to make money.

Natural Gas is also used as a ‘peak fuel’ for electric generation. (The gas turbines are cheap to make but more expensive to fuel than a coal plant, so coal is used for ‘baseline’ and gas for ‘peak’. That gives the optimal use of both capital and variable costs). OK, in North America Nat Gas demand has gone up due to the East Coast being hot (AC demand) and in South America it’s going up due to heating demand. Double Dip for Natural Gas! And even though most natural gas is priced locally (not much pipeline from Alaska to Argentina…) there is increasing LNG trade.

So we have at a minimum a hemispheric increase in natural gas costs that will hit DOW, DD and similar folks, but help the competitive position of EMN and SSL. AND companies like PWE and HGT ought to be getting more for their gas. Also, CHK Chesapeak and APA Apache will have a longer term benefit (they are driven by many factors, not just natural gas demand, but also exploration and production issues / costs and “sovereign risk” ( AKA “What will our government do to destroy wealth creation next?”) so may move contrary to the nat gas price for periods of time.

Crops:

OK, general cold in Argentina and South Africa (with probable for Australia / New Zealand) also cause crops to have issues. Aside from deciding that Southern Hemisphere White Wine will be better than Red for the 2010 vintage ;-) there is the likely impact on wheat and related crops. Again, the Northern Hemisphere is having a few heat issues in the mid-west and now the Southern Hemisphere is having cold issues? Watch for wheat and grain prices to rise as this understanding seeps in ( DBA and JJG have been on a 3 week rocket ride from what looks like a bottom…)

This then implies that animals that eat those expensive grains will be sold off rather than fed and meat prices ought to be dropping. COW that had been rising nicely most of the year rolled over about 2 months ago and dropped, then has returned to the Simple Moving Average stack from below. I think we’ve seen that return to the SMA stack from below is “not a good thing” and is a signal to be out of that market…

Ripples from Ag:

So for a little while, expect hamburger and steak prices to lower and bread and tofu prices to rise… This, of course, has ripples into places as diverse as Cargil (privately held), Monsanto (MON), General Mills (GIS), Kellog (K), ADM, and then on to companies like Deere DE and through them to CAT and Cummins Engines (CMI). All three of DE, CAT, and CMI look like nearly the same chart – a nice run up that has topped out and is ‘wedging in’ sideways. If the grain farmers have a bad year, how many will be buying new equipment? Prepare for a drop in those stocks as the weather impacts solidify.

You can continue further:

This ripple effect continues on out, but with less trade utility as it gets more dilute. But clearly the grocers start to have an impact and since they buy trucks too, they reflects back on the equipment makers. All these folks hire employees, who need uniforms, so if they do / don’t hire you get impacts on garment makers, that then impact the demand for cloth, often made from petrochemicals from DOW and DD and so the cycle goes.

There are also the fertilizer and pesticide makers ( MON, MOS, POT ) and then all these folks buy farm pickups, as do the workers in farm country ( Ford F dominates). And places like shoe and boot makers too…

Then the bread and beef costs ripple on to the fast food companies and impact their profits as they have modestly static prices on all those printed menus from one season to the next.

Oh, and don’t forget that crop insurance costs will be rising… so those insurance companies will be paying out more. Probably a minor part of the business, so not much trade potential, but still an economic impact.

Eventually, through increased or decreased demand for pickups and equipment you end up at the miners who need to make the ore from which the trucks and tractors are made and the steel and aluminum companies that turn it into metals.

The Trade:

So at the end of the day, weather matters, and rather a lot, to this whole web of economic activity.

The trick to trading is to find that impact which is closest to the driver, yet not noticed yet by all the other players, and hop on that trade.

So it looks like COW is a bit late to get in on the first drop, but could have a new drop soon, while JJG is early in the rise process. “Long Grain and Short COW” ought to work for a while.

Then the insurers are probably a low impact, but worth avoiding due to Sovereign Risk and their exposure combined. Not enough clarity for a short trade, but enough for a “why go there? Just Walk Away” decision. Equipment? Looks a bit too indirect at this point, but worth watching. It’s run up on an ‘economic recovery coming’ story and if that fails to mature, will start to drop. Walk Away, but watch for a short trade…

Oh, and go buy some nice older S.H. Reds to cellar, it could be a few years for more, and get ready to drink more young crisp whites in the next couple of years ;-) But it looks like you will have a dining dilemma as the pasta prices will be rising while beef falls. Life can be cruel that way… Order the Prime Rib and a crisp white? It’s the optimal economic choice, but a deep claret tastes better to me. Of course, pasta does not increase MUCH in price with wheat prices (mostly capital and labor), so perhaps that crisp white with a “Scampi Alfredo” would be best ;-)

And longer term, the demand for LNG shipping will rise. TGP has broken out of it’s sideways pause of 2 months ago into a new 45 degree rising right side run. It’s yield is down to 7%, but I’m fine with that (it’s the same dividend I bought back at 10%, just the stock price has risen now). And HGT has also dropped to a 7.9% yield as it has risen in price too. (I own both of them. Now you know why…)

So my trade would be (and in fact has been for a while now) to own the LNG shippers and gas rich Oil and Gas trusts, along with avoiding the folks dependent on gas. While watching the others for opportunities.

Collateral Possibles:

There are further collateral possibles. Things that become speculative things to watch. Sugar, for example. If it’s frozen in Argentina, could it be cooler in Brazil or wetter? (Sugar loadings were recently halted in Brazil due to rain… yes, just a brief weather event but…) So what is SGG doing (and through it, CZZ the sugar and alcohol maker…)?

Sugar SGG and Cozan CZZ

Sugar SGG and Cozan CZZ

Sugar has bottomed and is rising nicely. CZZ is volatile, but also doing nicely. (I have owned CZZ for a while now) With the sugar prices rising, CZZ will do even better. (I would expect more marginal sugar areas to have weather issues prior to Brazil having much drop of production, so the loss in California sugar beets is my gain in Brazil…)

Argentine Ski Resorts ought to do well this year. To the extent it carries over into a Northern Hemisphere cold winter, places like Vail Resorts (MTN) ought to have a good year. Their chart is falling now (summer up here), but worth watching for an ‘entry’ as our summer wraps up. Folks don’t like cold cruises much, so RCL Royal Carib. and CCL Carnival Cruise Lines will need to reroute to warmer places or have cold passengers ‘talking dirt’ about their trips. (Both are in down trends at the moment, after rising until a couple of months ago.

Conclusion

I hope this has been helpful in seeing how weather is very very important to investment decisions. It is one of the largest and most direct drivers in many sectors. Travel and Leisure, Ag Related, Insurance, Home Builders, Natural Gas, Chemicals. It’s a very high impact factor.

I also hope the examples here show you how to take a simple news report and turn it into an ‘investment thesis’ for investigation. Every time a ‘weather event’ hits the news, this type of process is what runs through the mind. Who does it help, who does it hurt, what collateral impacts, what duration?

And also “Do I know something the general public doesn’t?”. So to the extent folks have embraced a ‘Global Warming” driven investment thesis and I can buy into LNG tankers and more Nat Gas demand, well, I win.

About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in AGW and Weather News Events, Economics - Trading - and Money and tagged , , . Bookmark the permalink.

7 Responses to Argentine Polar Cold

  1. oldtimer says:

    A couple of weeks ago The Economist ran an interesting article on how Big Oil became Big Gas. It made the point that, because of the huge investments involved, LNG plants only went ahead after the developer had secured enough long term contracts (such as 20 years) to underpin the projects. This provided an element of price stability for the gas – unlike the volatility of oil prices.

    The point was also made that carbon taxes, driven by the AGW hypothesis, would also promote the greater use of gas in new power stations.

    Another example of weather driving sales is provided by Land Rover. About a year ago they were carrying excess stocks of finished vehicles and had slowed down production. Then came the snow and ice and the show rooms emptied in double quick time. Even now there is a waiting time for many of the new models. I know because I am thinking of getting one ready for the cold weather, snow and ice to come. Last winter we could not get out for two or three weeks with our fwd cars.

  2. Chuckles says:

    Nice overview E.M.

    And thanks for reminding me that a continuation of the current trends is going to make a severe dent in stocks of some of my favourite southern hemisphere wines.

    Minor point, SASOL originally developed their processes using coal as the feedstock, building the plants ‘at the pithead’ if you like. Since 2004, they have been using a natural gas pipeline feed from Mocambique, and I believe the plants are essentially ‘dual fuel’.

    http://www.allbusiness.com/energy-utilities/oil-gas-industry-oil-processing/5572891-1.html

    Many people seem incapable of understanding that feedstocks are just that. If something starts getting expensive, it just makes the alternatives look more attractive. Hotellings rule in action.

    A common example I’ve seen is that Americans firmly believe that fertilizer is made from ‘fossil fuel’ i.e. oil or natural gas. It is very difficult to convince them that in much of the world, coal is the nominal feed stock, although ammonia is the real thing. Or that anywhere there is plentiful hydro or similar power, the feedstock is air and water…..

  3. E.M.Smith says:

    @Oldtimer: Yipes! I forgot to mention that whole ‘bad weather gear’ category of 4×4 cars and trucks, snowmobiles, snow blowers, etc. The Range Rover example is a great one.

    @Chuckles: Yeah, I groan every time I hear that AGW talking point about running out of oil meaning no fertilizers or the Greens talking point that corn is mostly petroleum due to synthetic fuels. They just don’t understand the chemistry involved.

    We can make all the nitrogen fertilizer we want using a nuclear power plant.

    One of my favorites is Rentech RTK who have a ‘trash to liquids’ plant turning trash into synthetic oil. One of their first products was a synthetic fertilizer from the synthesis gas…

    http://www.rentechinc.com/companyOverview.php

    We are developing and licensing our clean energy technologies for ultra-clean synthetic fuels, chemicals and power production. We are pursuing the worldwide deployment of our patented and proprietary Rentech-SilvaGas biomass gasification technology as well as our patented Rentech Process. Together with gasification and upgrading technologies, the Rentech Process can economically produce ultra-clean synthetic fuels such as military and commercial jet fuels and ultra low sulfur diesel as well as specialty waxes and chemicals from a wide variety of waste, biomass and fossil resources.

    We also own one of the few remaining U.S. ammonia fertilizer production facilities, Rentech Energy Midwest Corporation (REMC). REMC is a major supplier of nitrogen products to the agricultural and industrial markets in the upper Midwest.

    Our process produces biodegradable RenJet® and RenDiesel® transportation fuels that are cleaner burning than petroleum-derived fuels and either meet or exceed all applicable fuels and environmental standards. In addition, with carbon capture and sequestration, the carbon dioxide emissions from the production of synthetic fuels from the Rentech Process are substantially lower than those generated in the production of petroleum-derived fuels. Therefore, fuels produced from our process are among the most greenhouse gas friendly transportation fuels available.

    I own about 1000 shares of these guys as a hobby. (It’s about $1 a share most of the time…)

    Whenever that whole “running out” meme comes along, I just think of these folks. Chemicals, fuels, fertilizers. All from trash. And we don’t hear much about a ‘trash shortage’ now do we ;-)

  4. pyromancer76 says:

    All seems like such good common sense, doesn’t it? Of course, these issues are all interconnected and weather (with overall climate-cycle conditions in mind) matters. My father and his sister, who grew up on a homestead, used to converse frequently regarding “The Weather”. Other family members (city folk) were not amused.

    Thanks for your clear head and and your willingness to offer us the details. I feel so sad for those who died in the cold in Argentina (if the story was accurate) just like I deeply felt the loss of those in Mongolia who lost their herds last winter — their entire livelihoods — to the bitter cold. I hope citizens will awaken and take back their countries/governments from the elitists who keep lining their pockets using perverse prevarications and applauding/educating-for ignorance.

  5. Can I recommend Carrick (dot co dot nz) for a great maker of SH reds. Their vineyard is on old hydraulically mined river terraces, and their water supply is pumped from the galleries of the old coal mines underneath which used to fuel the dredges which worked the Clutha and Kawarau rivers just down the hill. Both rivers are raised now, thanks to the Clyde dam.

    That’s just the sort of industrial past I love, and the wines show it. Still have a bottle or three of their 2004 Pinot Noir, waiting for the perfect steak to have with it…

    And of course you’re so right about the investment possibilities. Food and its underpinnings is going to be a big deal in the not too distant future, and places with lots of Water are the other buy….

  6. E.M.Smith says:

    Nice web site. If you just copy / paste the link it becomes a live link automagically (just don’t have any text touch it…)

    http://carrick.co.nz/

    If you have other favorites, feel free to post links for them, too. Always open to suggestions on wine choices ;-)

    Also find the dredger tailing story interesting. We have a whole lot of dredger tails in California near rivers… often sold dirt cheap… Hmmm….

    BTW, the Porterhouse is, IMHO, the best steak in the world. Followed closely by Prime Rib, but technically that’s a roast not a steak… Though a rich Pinot Noir goes best with Leg ‘O Lamb, slow roast and falling off the bone…

  7. oldtimer says:

    Slightly OT – I see that someone else has been looking at station IDs here:
    http://statpad.wordpress.com/2010/07/19/ghcn-twins/

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